The COVID-19 crisis has caused a lot of people to change the way they think -- and spend their money. In fact, many people have had no choice but to hit pause on retirement plan contributions due to the pandemic. It's encouraging, therefore, to hear that 72% of Americans plan to prioritize their nest eggs once the crisis is over, according to a recent TD Ameritrade survey. And that's an important goal to aim for no matter your age.
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The importance of retirement savings
Why do you need a nest egg going into retirement? It's simple: Social Security won't provide enough financial support during your golden years. The average recipient today collects about $1,500 a month, or $18,000 a year, in benefits, which isn't a whole lot of money to live on -- especially when you factor in the cost of healthcare during retirement, which can be astronomical even if your health itself is just fine.
Here's another way to look at it: Social Security will generally replace about 40% of your pre-retirement income if you're an average earner. Most seniors, however, need more like 70% to 80% of their former earnings to live comfortably. After all, while your home might be paid off in time for retirement and you stand to save money on commuting costs, the rest of your bills will largely be the same. And in some cases -- think healthcare -- they'll likely climb. As such, you need savings to bridge the gap between what Social Security will pay you and the income level you actually need to maintain a decent quality of life.
How to achieve your retirement savings goals
Right now, you may be grappling with income loss during the pandemic. Or, you may be focusing on near-term needs -- boosting your emergency fund, paying off high-interest debt, and doing other things to protect yourself in the course of the next six months to a year. Once the pandemic is over, though, it pays to give your retirement plan some serious attention.
One good way to ensure that you stay on track savings-wise is to make the process automatic, so once you're looking at a steady paycheck and your immediate financial concerns are addressed, sign up to have money allocated to your employer's 401(k) plan, or find an IRA with an automatic transfer feature that allows you to move money directly from your checking account to your retirement plan on a regular basis. Automating the savings process will remove the temptation to spend that money elsewhere, making it more likely that you'll wind up saving the amount you want to.
How much should you be saving? Well, it depends on your age and existing IRA or 401(k) balance. As a general rule, it's wise to set aside 15% to 20% of your income for retirement purposes, but if you're already in your 40s or beyond and don't have much of a nest egg yet, you may want to aim even higher. And on the flipside, 15% might be a stretch for you, and that's OK. In that case, save as much as you can once your income steadies, and then try to do better over time -- such as banking your annual raises.
An estimated 37% of Americans did not regularly contribute to a retirement account before the pandemic hit. If you were one of them, now may not be the time to take on that added challenge, especially if you're struggling at all with your immediate bills. But once the crisis comes to an end, it definitely pays to focus your attention on building retirement wealth -- because you're absolutely going to need it.